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Abstract

The discovery of diamonds coupled with undesirable characteristics of political institutions cast doubts of a natural resource-led growth in Zimbabwe. I used the discovery of diamonds in Marange to provide evidence of waste and corruption of mineral wealth by political elites. I build on Mehlum et al (2006) rent seeking model to capture the active role played by powerful agents in the domestic political economy in rent seeking activities. I introduce a new assumption into the model that restricts the entry of producers into rent seeking activities and free entry of grabbers into and out of grabbing. The discovery of diamonds presents huge gains for actors who can control access to diamonds. In this case, political elites have the incentive to use their authority to gain control over the valuable resource and use state violence to restrict access of any interested player. The extent to which political elites are successful in rent seeking depends on the quality of institutions. Breakdown in the rule of law enables elites to trade future development goals for personal short-term gains through exploitative ways. The model predicts that the discovery of a valuable resource in countries with bad institutions has positive effects when producers are restricted entry into grabbing. On the other end, free movement of entrepreneurs in countries with bad institutions has negative consequences for economic growth. However, discovery of diamonds reaps the highest benefits for the economy when political institutions are transparent and are able to work together with economic institutions to ensure optimal use of mineral wealth that will benefit society. Hence, good institutions are of uttermost importance to foster development in natural resource endowed countries.